Monthly Archives: June 2016

June 27, 2016 · 4:10 pm

June 27, 2016

The Markets

SURPRISE! Britain is leaving the European Union (EU) after 40 years of membership.

Last Thursday, almost three-fourths of voters in Britain – about 30 million people, according to the BBC – cast ballots to determine whether the United Kingdom would remain in the EU. By a slim margin, the British people opted out.

Early Friday, Reuters reported on the immediate and potential repercussions of the decision:

“Britain has voted to leave the European Union, forcing the resignation of Prime Minister David Cameron and dealing the biggest blow since World War II to the European project of forging greater unity. Global financial markets plunged on Friday…The British pound fell as much as 10 percent against the dollar to levels last seen in 1985…The euro slid 3 percent…World stocks saw more than $2 trillion wiped off their value, with indices across Europe heading for their sharpest one-day drops ever…The United Kingdom itself could now break apart, with the leader of Scotland – where nearly two-thirds of voters wanted to stay in the EU – saying a new referendum on independence from the rest of Britain was ‘highly likely.’ ”

U.S. stock markets dropped sharply, too. Barron’s reported markets’ response to the British exit (Brexit) didn’t indicate the bull market in America was over. Citing a report from Morgan Stanley, the publication noted American companies generate 70 percent of revenues domestically, which means U.S. stocks are less susceptible to the vagaries of international events than those of many other countries. That may make U.S. stock markets attractive to investors.

During the next few weeks, as the immediate and extreme response to the news settles and investors realize little will change immediately, the world should gain a better understanding of the ways in which Brexit will affect Britain and everyone else.

WHAT HAPPENS NOW? It seems likely the British government will spend the next few weeks or months developing a strategy for its departure from the EU.

Right off the bat, the British need to put a new leader in place. Prime Minister David Cameron resigned after his side lost Thursday’s vote. Cameron’s comments suggest he does not plan to invoke Article 50. He indicated the new Prime Minister should be responsible for initiating the process.

Article 50 is a clause in the Lisbon Treaty describing the legal process a country must follow to notify the European Union it intends to withdraw. Once notification is delivered, there is a two-year window to complete negotiations. Any extension of negotiations requires the agreement of all EU members, according to The Guardian.

Once they’ve given notice, the U.K. will have to negotiate the terms of its exit from the EU and establish the terms of its future relationship with the group. According to the International Monetary Fund (IMF), the nation also will need to renegotiate trade relationships with 60 or so non-EU countries where its trade is currently guided by EU agreements.

No one can be certain how Britain’s economy will be affected as the nation determines its new position in the world’s pecking order. However, The Economist reported on two possible futures, as set forth by the IMF:

“In the first scenario, Britain quickly agrees on a new trade deal with the EU; in the second, the negotiations are more protracted and Britain eventually settles for basic World Trade Organization rules. In the first scenario, sterling depreciates by 5 percent. GDP growth slips to 1.4 percent in 2017 and unemployment rises slightly…In the second scenario, Britain falls into recession next year. Unemployment hits about 7 percent by 2018, up from around 5 percent now (during the financial crisis it peaked at 8.5 percent). Real wages will stagnate, mainly because of high inflation. Surprisingly, Britain’s trade balance will move into a small surplus, thanks not to the dynamism of exporters but ‘because demand for imported goods plunges due to exchange-rate depreciation and reduced consumption.’ ”

In a victory speech, Boris Johnson, former Mayor of London, Brexit supporter, and a favorite to become the next Prime Minister, said:

“In voting to leave the EU, it is vital to stress there is no need for haste…There is no need to invoke Article 50…We have a glorious opportunity to pass our laws and set our taxes entirely according to the needs of the U.K.; we can control our borders in a way that is not discriminatory but fair and balanced and take the wind out of the sails of the extremists and those who would play politics with immigration.”

EU leaders appear to have a different timetable in mind than recommended by Cameron and Johnson. In a joint statement, Martin Schulz, President of the European Parliament, Donald Tusk, President of the European Council, Mark Rutte, Holder of the Presidency of the Council of the EU, Jean-Claude Juncker, President of the European Commission, said:

“We now expect the United Kingdom government to give effect to this decision of the British people as soon as possible, however painful that process may be…we hope to have [the U.K.] as a close partner of the European Union in the future. We expect the United Kingdom to formulate its proposals in this respect. Any agreement, which will be concluded with the United Kingdom as a third country, will have to reflect the interests of both sides and be balanced in terms of rights and obligations.”

Will this be the glorious opportunity promised by the leaders of the ‘leave’ side or a tragic split as predicted by the ‘remain’ leaders? Much depends on when and what Britain negotiates with the EU. In the meantime, there is likely to be considerable economic uncertainty and some market volatility.

Weekly Focus – Think About It

Since the outcome of the referendum was announced, the top questions asked of Google in the U.K. have been:

1. What does it mean to leave the EU?2. What is the EU?3. Which countries are in the EU?4. What will happen now that we’ve left the E.U?5. How many countries are in the EU?

NPR opined that British voters seem to have given serious thought to the implications of their choices after the polls had closed.

* These views are those of Peak Advisor Alliance, and not the presenting Representative or the Representative’s Broker/Dealer, and should not be construed as investment advice.* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.* The Standard & Poor’s 500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10- year Treasury Note as a benchmark for the long-term bond market.* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.* Past performance does not guarantee future results. Investing involves risk, including loss of principal.* You cannot invest directly in an index.* Stock investing involves risk including loss of principal.* Consult your financial professional before making any investment decision.

Today we received the unprecedented news that the United Kingdom (U.K.) has voted to leave the European Union (EU), which had led to significant volatility in the global markets. In situations like these, it becomes more important than ever to remain calm, harness our emotions, and stay committed to our long-term plans. Although this result was unexpected, as your financial advisor, I am here to offer continued support and guidance through these challenging market events.

Yesterday, June 23, the United Kingdom (the U.K., comprised of England, Scotland, Northern Ireland, and Wales) undertook an all-country referendum about whether the U.K. should stay in or exit the EU, which it has been a member of since 1975. This vote, referred to as the “Brexit” vote, is done by allowing all citizens to cast their ballot on whether to “remain” or “leave.” In a very close vote, “leave” brought in 51.9%.

In the days immediately before the vote—although it was expected to be close—the polls suggested a slight tilt that the U.K. would remain; financial markets reacted positively, with stocks around the globe rising in value, along with most foreign currencies. Early Friday morning overseas, as it became clear that, in fact, the U.K. had voted to leave, these recent gains were reversed and there have been sharp declines in global equity markets, particularly in Europe and Japan. European currencies have also weakened relative to the dollar. Essentially, the markets were expecting a “remain,” were surprised by a “leave,” and thus are reacting negatively.

Though the questions surrounding exactly how and when the U.K. extrication from the EU will happen has caused near-term financial turmoil, the actual “leave” vote does not create an immediate change in the day-to-day functioning of the markets. Rather, it’s the beginning of a process that may take two years or more to fully execute. However, in the short term, there is some additional uncertainty politically: U.K. Prime Minister David Cameron has already announced his intention to resign. There are also upcoming elections in other European countries, including Spain, this weekend. All of these just raise more questions than the markets typically like to see, which is causing this near-term turmoil.

However, as the market gets over the Brexit shock and answers start to come on other fronts, this turmoil should settle some. The global economic system is better prepared to deal with financial panics than it has been historically. Most global banks are in much better shape than they were leading up to the financial crisis in 2008, and central banks are prepared to extend credit to institutions and countries to help them manage short-term liquidity problems if they arise.

The United States is insulated, though not immune, from events overseas. Although there has been a decline in U.S. stocks early today, it is smaller than the declines in foreign markets. The U.S. economy and the U.S. stock market are built on a foundation of domestic consumption of goods and services. Our economy is impacted by events globally, but it is not dependent on them.

In times of financial market stress, we must remember our investments are for the long term. This is a time for caution, but not panic or overreaction. Although our emotions might be telling us to act, we must resist this urge and strive to maintain a patient, long-term focus on the future. Some volatility may persist in the short term, and although we do not know for certain what lies ahead for the markets, the best course of action is to face it with a steadfast commitment to let reason, not emotion, drive our investment plan.

I am here to help you understand these very challenging times and will continue to keep you informed of all developments. As always, if you have any questions, I encourage you to contact me.

Thank you for your continued trust and confidence.

Sincerely,

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

Economic forecasts set forth may not develop as predicted.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

A one-two punch was delivered with the Federal Open Market Committee (FOMC) meeting leading and concerns Britain will leave the European Union following.

On Wednesday, the Federal Reserve confirmed what many had suspected. There would be no June rate hike. There was unexpected news, too. The Fed lowered its projections for U.S. growth to 2 percent through 2018. Barron’s reported the stance of various committee members had shifted from the previous meeting:

“At this week’s confab, there were seven projections for two increases, to 0.875 percent, and six for a single hike, to 0.625 percent. There also were two outliers expecting more hikes to above 1 percent. Excluding the highest and lowest guesses, the “central tendency” was in a range of 0.6-0.9 percent, according to the Fed’s projections…In March, however, there was a solid consensus of nine members expecting two hikes to 0.875 percent, and seven looking for more hikes to over 1 percent. Back then, the single outlier was calling for just one increase to 0.625 percent.”

In the past, dovish Fed actions have pushed U.S. stock markets higher; however, stocks were lower by the end of the day on Wednesday, according to MarketWatch.

Investor reticence may owe much to concerns about the possibility of a British exit. Experts cited by Barron’s suggested an EU exit may already be priced into markets since European bank stocks “have been crushed…with some down 40 percent and others at lows not seen in years.”

Treasuries and high-quality government bonds rallied through the end of the week as investors opted for ‘safe haven’ investments*. On Friday, investors took profits after eight days of gains and rates pushed slightly higher, reported The Wall Street Journal.

*US treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit and market risk. They are guaranteed by the US government as to the timely payment of principal and interest and, if help to maturity, offer a fixed rate of return and fixed principal value.

ARE YOU WORTH YOUR WEIGHT IN PLATINUM OR, MAYBE, SAFFRON? Gold is not the only substance that commands a hefty price per pound. The Telegraph recently reported on the most valuable materials in the world by weight and some were quite surprising!

Saffron is the most valuable spice in the world. Most of the world’s saffron comes from Iran and it can cost as much as $65 a gram, according to The Guardian. There are almost 454 grams in a pound, putting the value of saffron at $29,510 a pound.

Beluga caviar is mighty expensive. Guinness World Records puts the price at about $34,500 a kilogram. A kilogram is a little more than two pounds.

Platinum is expected to cost about $1,005 an ounce during 2016, according to Kitco. There are 16 ounces in a pound, putting its per pound value at $16,080.

Gold may run about $1,250 an ounce, or $20,000 a pound, by the end of 2016, according to CNN Money.

White truffles are “the fanciest tubers in the fungi kingdom,” according to Vox.com. A four-plus pounder sold for $60,000 at auction in 2014, but more common varieties sell for about $300 a pound.

Venom is pretty tough to harvest, and it commands a premium price. Snake venom runs about $370 per gram, scorpion venom about $596 per gram, and spider venom comes in at about $1,342 per gram. Multiply these amounts by 454 and you get (per pound for each) $167,980 for snake venom, $270,584 for scorpion venom, and $609,268 for spider venom!

Gram for gram, there are some things in the world more valuable than gold!

Weekly Focus – Think About It

“My father gave me the greatest gift anyone could give another person, he believed in me.” –Jim Valvano, College basketball player, coach, and broadcaster

* These views are those of Peak Advisor Alliance, and not the presenting Representative or the Representative’s Broker/Dealer, and should not be construed as investment advice.* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.* The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.* The Standard & Poor’s 500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.* Past performance does not guarantee future results. Investing involves risk, including loss of principal.* You cannot invest directly in an index.* Consult your financial professional before making any investment decision.* Stock investing involves risk including loss of principal.